Testing the applicability of the Altman's "Z-Score formula" model on the Kenya's Commercial Banks

Abstract

Banks are formed to operate in the foreseeable future. However there are cases where a bank fails to fulfill its objectives or survive in its environment, forcing it to bankruptcy leading to great losses. Various models like Altman Model are used in predicting bankruptcy. This paper seeks to test the applicability of the Altman's "Z score formula" model in Kenya's commercial banks and find out if it is used by the banks. Financial statements of 10 banks between 1994 and 2003 were collected. Their Z score was calculated, compared with Z score cut off limit, and then grouped as either bankrupt or non-bankrupt. The grouping was then compared with the current bank situations. Results show Altman's Model has prediction accuracy of 68.8% and 56.3% one-year and two years prior to failure respectively and it is applicable in Kenya. However, it is not utilized as most banks use Central bank standard ratios. This paper highly recommends the adoption of the Altman model